The following guest post is by Jeremy Brown, CEO of RapidAdvance, an organization that has provided over $500 million in customized funding solutions to more than 10,000 small businesses.
Following Mark Cuban’s recent comments in a business TV interview where he called entrepreneurs who considered starting a business with borrowed money ‘moronic’ and suggested ‘no small businesses fail from lack of capital,’ it’s pretty safe to say that the small business community now joins NBA referees and commissioner David Stern, among those that have crossed Mr. Cuban off their holiday card list.
Mr. Cuban’s main critique is that taking on debt is a slippery slope and your lender cares little about your dreams, but a great deal about his cash. The umbrella concern being that borrowing money is a very fast way to losing control of your business. His solution to launching and sustaining a business is to self-fund through a combination of sweat and tears that hard-work overcomes all, or good enough ideas will find investors rather than lenders. Equity in Mr. Cuban’s mind being a much preferred vehicle to drive growth than debt financing.
What’s particularly interesting about the critique is that as businesses grow, owners often have to– cede some degree of control. This is the case whether taking on equity or debt. The reality is very few businesses are wholly-owned successes that continue to fund themselves through their business savings or cash flow alone. I think both the investor/equity community, from angels to venture capitalists, to the lending community from banks to alternative lenders, when putting aside their respective business interests, all agree that self-funding is the best option if you have the option. But very few companies live in that world.
Many would argue that outside investors with an equity stake are no more incented towards the desired outcome of the business owner than the lender who seeks repayment on the loan. All of us who study business know that equity investments can come in the form of strategic investors or simply cash. We also appreciate that often equity investors enjoy privileges like rights to first profits or exits/payouts, which owners may not. A tough pill to swallow for the business owner.
While borrowing (debt) indeed has its vulnerabilities (yes, you have to make good on your loans), there are greater core benefits such as retaining complete control of your company, as well as potential ancillary wins like favorable tax benefits, and new debt products have offset age-old objections that borrowers are particularly exposed in tougher times for their business.
The simple truth is there needs to be more choices for entrepreneurs. There is no right answer that applies broadly, and in fact, over time, many businesses use both debt and equity financing strategies individually, or in tandem as a means of imparting balance around the opportunities and vulnerabilities inherent in each strategy.
Ultimately, a business’ success or failure rarely is driven by the particular vehicle for capital/financing (though terms are important.) But make no mistake about it, capital in whatever form is the lifeblood of small businesses, and more options is inarguably better than few.